Structure of this Presentation

1
Structure of this Presentation

• Understanding the unique Indian context
• A Historical Perspective Why has the use of
  Third Parties in the procurement process been
  such a sensitive issue ?
• The Current Legal Framework
• Requirement to register as Defence Agent
• How many persons have registered?
• How successful has this policy been?
• The Defence Procurement Procedure restrictions
  on the use of Defence Agents and the
  Pre-Contract Integrity Pact
• What are the relevant provisions regarding the
  use of Third Parties in the Procurement Process?
• Agency restrictions As a practical matter
• Suggested points of guidance for foreign bidders
  seeking to use Third Parties in the Indian
  defence procurement process.
• The Way Forward Is there a need to change the
  way India government perceives the role of Third
  Parties in the procurement process?

2
AGENCY RESTRICTIONS UNDERSTANDING THE INDIAN
CONTEXT

• Throughout the history of commercial life
  nobody has ever quite liked the commission
  man. His function is too vague, his presence
  always seems one too many, his profit looks too
  easy, and even when you admit that he has a
  necessary function, you feel that this function
  is, as it were, a personification of something
  that in an ethical society would not need to
  exist. If people could deal with one another
  honestly, they would not need agents.
• - Raymond Chandler

3
AGENCY RESTRICTIONS UNDERSTANDING THE INDIAN
CONTEXT

• In my view, middlemen should never be allowed in
  defence procurement deals as these elements carry
  out acts of subversion against the military
  establishment and intelligence agencies.. hike
  the price of equipments by at least 15 percent.
  . And are at best post offices for defence
  deals they have little or no knowledge about
  the equipments, systems and their operational
  details
• Admiral Vishnu Bhagat (Indias former Naval
  Chief)
• To a large extent, Indian regulations on Third
  Parties appear to be based on this premise.

4
AGENCY RESTRICTIONS A HISTORICAL PERSPECTIVE

• WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA?
• BEFORE 1985, almost all defence deals were
  carried out with the erstwhile Soviet Union on a
  government to government basis.
• Consequently, it is believed that third parties
  had no or little role to play during these years.
  
• However, some accounts suggest that even in the
  1970s and 1980s, the Ministry of Defence
  maintained a 100-strong list of defence agents
  (some of whom allegedly figured in the CBIS
  (Indias equivalent of the FBI), annual
  undesirable contact men (UCM) list
• While some reports did appear in the press
  alleging involvement of third parties in
  kickbacks, these were never substantiated. Given
  the lack of transparency and secrecy associated
  with defence procurement deals before the 1990s,
  little public information exists in the public
  domain as to the extent of involvement of third
  parties in the pre-1985 years.

5
AGENCY RESTRICTIONS HISTORICAL PERSPECTIVE

• WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA?
• At about the time India started exploring
  options outside of purchasing military equipment
  only from the Soviet Union, came
• THE BOFORS SCANDAL INDIAS WATERGATE
• Indias first major corruption scandal involving
  defence procurement

6
AGENCY RESTRICTIONS HISTORICAL PERSPECTIVE

• WHY IS THIS SUCH A SENSITIVE ISSUE FOR INDIA?
• BOFORS
• In March 1986, a 1.4 billion contract between
  the Indian government and Swedish arms company AB
  Bofors signed for supply of four hundred 155mm
  howitzers.
• Shortly thereafter, the then Prime Minister Rajiv
  Gandhi and several others were accused of
  receiving kickbacks for this deal.
• Ottavio Quattrochi was a businessman close to the
  Gandhi family. His name came up as the middleman
  in this deal.
• Even though the alleged kickback was only USD 15
  million, the public outcry that followed led
  DIRECTLY to the defeat of the Congress party in
  the 1989 general elections (only the second time
  in the history of independent India that the
  Congress Party had lost the general elections)

7
AGENCY RESTRICTIONS HISTORICAL PERSPECTIVE

• BOFORS ENSURED THAT THE ROLE OF THIRD PARTIES IN
  THE PROCUREMENT PROCESS REMAINED HIGHLY
  CONTROVERSIAL
• IN THE LATE 1980S, AN ABSOLUTE BAN ON DEFENCE
  AGENTS IN THE PROCUREMENT PROCESS WAS IMPOSED

8
CURRENT LEGAL FRAMEWORK GOVERNING DEFENCE AGENTS
IN INDIA

• The ban on defence agents was lifted in November
  2001.
• The Central Vigilance Commission (CVC), (which
  probed several defence deals that were under a
  cloud because of allegations of payment of
  kickbacks), had recommended on open system of
  registering agents.
• At the time the new regulations were announced, a
  senior defence ministry official stated The new
  guidelines will make things more
  transparent,after the ban was imposed.defence
  agents never went away. They simply went
  underground but continued to play a part in
  arranging defence deals.

9
CURRENT LEGAL FRAMEWORK GOVERNING DEFENCE AGENTS
IN INDIA

• Relevant Indian regulations
• a circular issued by the Department of
  Expenditure, Ministry of Finance, (No. F.23 (1) -
  E. II (A) / 89) dated January 31, 1989, (1989
  Notification) and
• notification (No. 3(2)/ PO (Def) 2001 dated 2nd
  November 2001), issued by the Ministry of Defence
  (2001 Notification).
• The 1989 Notification sets forth the policy on
  Indian Agents of Foreign Suppliers and
  specifically states that it is not the and
  that wherever it is possible to secure supplies
  and ensure after-sales-services etc., on
  reasonable terms without the intercession of
  agents, there is no need for engaging any such
  agent.
• However, since the instructions contained in the
  1989 Notification were applicable only to civil
  purchases, the Ministry of Defence issued
  supplementary instructions to the 1989
  Notification vide the 2001 Notification

10
CURRENT LEGAL FRAMEWORK GOVERNING DEFENCE AGENTS
IN INDIA

• The 2001 Notification envisages the regulation of
  Defence Agents
• through a system of registration with the
  Ministry of Defence
• open declaration of the services to be rendered
  by the Defence Agent and
• the remuneration payable to the Defence Agent by
  way of fees, commission or any other method.

11
What does registration as a Defence Agent
entail?

• Disclosure of a wide array of information to the
  Ministry of Defence, including
• names and address of all the banks, within and
  outside India, where the Agent holds accounts.
• its previous professional background, and
• copies of all agreements with the principal.
• Nature of services to be rendered by an Agent and
  the commission payable for rendering
  specifically defined obligations shall
  unambiguously be reflected in the contract
• Scale of payable fees/ commissions must follow
  the guidelines approved by the Ministry of
  Defence. All particulars relating to payments
  must be reported to the Enforcement Directorate
  (which, in turn send such information to the
  CBDT, CBEC and RBI to prevent leakage of foreign
  exchange and tax evasion on agency commission)

12
What does registration as a Defence Agent
entail?

• Ministry of Defence has been given wide
  powers in granting or refusing registration/
  accreditation.
• 2001 Notification categorically states
• The Ministry of Defence reserves the right to
  inform the Foreign supplier that the Agent is not
  acceptable without assigning any reason.

13
REALITY How many Duly Registered Defence
Agents are there?

• SINCE 2001, NOT A SINGLE AGENT HAS REGISTERED
  ITSELF WITH THE MINISTRY OF DEFENCE.
• The 2001 Notification is widely acknowledged to
  have been a COMPLETE FAILURE.
• While certain reports suggest that a few have
  attempted to apply for registration, there are no
  instances of the Ministry of Defence granting
  accreditation

14
Reasons for policy failure

• Onerous disclosure requirements, and several
  intrusive, unwarranted provisions.
• Apprehension that required information is too
  invasive and can make Third Parties vulnerable to
  harassment by official agencies.
• Harsh tone of the 2001 Notification. Conveys the
  impression that the government sees agents as a
  necessary evil that must be kept on a tight
  leash.

15
Defence Procurement Procedure restrictions on
bidders engaging Third Parties

• Restrictions
• Undertaking to be submitted by foreign vendor at
  the time a Defence Agent is proposed to be
  registered
• Agency Clause in the Pre-Contract Integrity
  Pact
• Agency Clause in the Standard Contract Document

16
UNDERTAKING TO BE GIVEN WITH REGARD TO DEFENCE
AGENT

• Contractual obligations of Agent to be disclosed.
• Commission/ fees to be paid to be disclosed, and
  must be within the ceiling proposed by Ministry
  of Defence.
• Confirmation that the Third Party proposed to be
  registered is the only person who will act as an
  Agent, and that no other middleman, sales
  consultant or advisor are being retained.
• Undertaking to be signed by CEO/MD.

17
Pre-Contract Integrity Pact

• Introduced for the first time in the Defence
  Procurement Procedure 2005, the Pre-Contract
  Integrity Pact necessarily needs to be signed
  for all procurement schemes over INR 100 Crores
  (approximately USD 25 Million).
• The bidders are required to sign and submit
  separately along with the technical and
  commercial offer.
• The Pre-Contract Integrity Pact is a binding
  agreement, by virtue of which the bidder makes
  several undertakings to the Indian government,
  including that no bribes shall be paid.

18
Pre-Contract Integrity Pact

• STATED RATIONALE FOR THE INTRODUCTION OF THE
  PRE-CONTRACT INTEGRITY PACT
• Although the practice followed all over the
  world pertaining to commission offered to make
  procurement through vendors is not known, certain
  countries like United States and some nations of
  Europe have adopted several mechanisms to prevent
  the use of undue influence in obtaining
  contracts. For instance, the Organisation for
  Economic Cooperation and Development (OECD)
  convention on combating bribery of foreign public
  officials in international business transactions
  has been adopted by certain European Nations.
  OECD convention prohibits the use of undue
  influence in defence contracts. Similarly, the
  Transparency International, an NGO has called for
  inclusion of integrity pact in contracts to
  ensure transparency and prevent undue influence
  in defence contracts.
• Ministry of Defence to the Indian
  Parliaments Standing Committee on Defence
•  

19
Pre-Contract Integrity Pact

• Objective Essentially to ensure that bidders
  take all measures necessary to prevent corrupt
  practices, unfair means and illegal activities
  during any stage of the bid or during any
  pre-contract or post-contract state in order to
  secure the contract
• It is in THIS CONTEXT that the Agency
  Restrictions have been set forth in the
  Pre-Contract Integrity Pact.

20
THE AGENCY CLAUSE

• Bidder confirms and declares that it .has not
  engaged any individual or firm, whether Indian or
  foreign whatsoever, to intercede, facilitate or
  in any way to recommend to the Government of
  India or any of its functionaries, whether
  officially or unofficially, to the award of the
  Contract.

21
Agency Restrictions a Practical Matter

• As a practical matter
• Foreign corporations interested in bidding for
  defence contracts in India need to ensure that
  they do not engage any person or entity that is
  required to perform any functions the nature of
  which mandate registration (as a Defence Agent)
  under Indian law.
• This entails an enquiry into the precise meaning
  of the phrase intercede, facilitate or, in any
  way recommend used in the Agency Clause.

22
INTERCEDE, FACILITATE, OR IN ANY WAY RECOMMEND

• Legally, it is difficult to predict the precise
  import of this phrase
• It has never been scrutinized by any Indian court
• The Ministry of Defence is free to take any
  interpretation and such interpretation shall be
  binding on the bidder and leaves little scope for
  applicability of principles of statutory
  interpretation .

23
INTERCEDE, FACILITATE, OR IN ANY WAY RECOMMEND

• OUR VIEW
• Given the context in which these restrictions
  have been imposed, the test to ascertain whether
  a third party requires to be registered, would be
  (i) the role that these Third Parties are
  expected to play in the acquisition process (ii)
  nature of their interaction with Indian
  government officials.

24
Suggested Points of Guidance

• Foreign corporations should ensure that their
  consultants take cognizance of the Agency
  Restrictions while carrying out activities in
  India.
• Activities categorized under three heads
• Activity which is prohibited
• Activity which appears to be permitted
• Activity which may be permitted, but may be best
  to refrain from.

25
Suggested Points of Guidance

•  Activity which is prohibited (without
  registration)
• Negotiation of any contracts on behalf of the
  foreign bidder.
• Promoting or marketing the products to the
  Government of India.
• Representing the bidder or acting as an interface
  with the Government of India
•  

26
Suggested Points of Guidance

• Activity which appears to be permitted
•  
• Merely making introductions to Indian
  governmental officials.
• Sharing of information available in the public
  domain with any officials of the Indian
  government.
• Assisting in trade shows, generic marketing
  activities, and conducting training services.
• Advising on defence procurement process,
  including in relation to competitor activities,
  and advising on campaign strategies.
• Assisting in administrative actions, such as
  submission of any documents to concerned
  officials in the Ministry of Defence.

27
Suggested Points of Guidance

• Activity which may be permitted (but which may be
  advisable to refrain from)
• Making presentations on non-public technical
  information, pursuant to a specific written
  request by an Indian governmental official.
• Attending meetings with Ministry of Defence
  officials (along with authorized personnel of the
  bidder) and not participating in any discussions.
  

28
General Guidance

• Advisable for foreign corporations to refrain
  from engaging any entity to act as a consultant
  for any particular procurement program.
• Ensure that all consulting relationships are for
  advice and assistance in connection with business
  opportunities in India, in general.

29
Grave sanctions for violation

• The Pre-Contract Integrity Pact sets forth the
  following sanctions
• immediately call off the pre-contract
  negotiations without assigning any reason or
  giving any compensation to the Bidder.
• To cancel the contract, if already signed,
  without giving any compensation to the Bidder.
• To cancel other contracts with the Bidder.
• To debar the Bidder from entering into any bid
  from the Government of India for a minimum period
  of five years, which may be further extended at
  the discretion of the Buyer.
• The decision by the Buyer to the effect that a
  breach of the provisions of this Integrity Pact
  has been committed by the Bidder shall be final
  and binding on the Bidder

30
Cases of Blacklisting

• Bofors (Blacklisted in 1989). Guilt of
  middlemen has never been established. Ban
  lifted in 1999 (at the height of the
  India-Pakistan Kargil War)
• Denel (Blacklisted in 2005). Alleged that Denel
  had engaged middlemen to offer bribes to obtain
  sensitive information about the internal
  proceedings of the Commercial Negotiation
  Committee. These allegations have not yet been
  established.
• Investigation on Israel Aerospace Industries
  Limited and Rafael Advanced Defence Systems
  Limited. In 2006, the Central Bureau of
  Investigation alleged involvement of middlemen
  (and kickbacks) in the acquisition of seven
  Barack I Anti Missile Defence Systems from Israel
  Aerospace Industries Limited and two hundred
  missiles from Rafael Advanced Defence Systems
  Limited. Investigations are ongoing.
• Seven companies (including, Israeli Military
  Industries, Singapore Technology, Media
  Architects (Singapore) and BVT Poland)
  (Blacklisted in 2009). Investigations underway.
  Allegations include, bribing Indian governmental
  officials as well as the involvement of
  middlemen.

31
Agency Restrictions

• No known instance of a defence corporation being
  blacklisted, merely on account of the
  corporation using a consultant to market its
  product. Thus far, all known cases of
  blacklisting in this context have also involved
  allegations of bribery and other corrupt
  practices.

32
Way Forward

• India needs to thoroughly review the current
  legal framework governing Third Parties in the
  Procurement Process.
• India must realize that Third parties are
  indispensable to international trade, and that
  they carry out many useful functions.
• However, most significantly, the government must
  change its basic approach and not view Third
  Parties in the procurement process with suspicion.

33
Some indication that a change in law may be on
the cards

• The Committee note with concern that despite
  the guidelines issued by the Ministry for
  appointment of authorized Indian representative
  agents of foreign suppliers, nobody has
  registered himself as an authorized Agent. The
  Committee are of the view that representatives of
  the suppliers in the country can play a useful
  role in After Sale Service and in sorting out
  problems during the warrantee period, etc. The
  Committee, therefore, strongly recommend that the
  Ministry may analyze the reasons for
  non-registration of authorized representatives
  with the Ministry and take remedial steps to make
  the procedure less cumbersome and simple so as to
  encourage the authorized representatives to come
  forward and register themselves.
• Indian Parliaments Standing Committee on Defence
  (December 2005)

34
Some indication that a change in law may be on
the cards

• The assumption that one can do without agents, I
  think, needs some reappraisal
• Indias Prime Minister Manmohan Singh
• However, as this reaction to the Prime Ministers
  statement illustrates, any proposed change will
  be met with stiff resistance
• With all due respect to the prime minister, I
  would like to clearly say he has been misadvised
  on the issue. It is very unfortunate that an
  honest man leading the country should have formed
  such an opinion, as presence of middlemen is a
  very dangerous trend. (Former Naval Chief,
  Admiral Bhagat)

35
THANK YOU VERY MUCH

• Mohit Saraf (msaraf_at_luthra.com)
• Senior Partner
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